Bundesbank slashes growth forecast and sounds alarm over trade war

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Germany faces another year of economic stagnation after the Bundesbank slashed the country’s 2025 growth forecast and warned that a US-led trade war risked pushing it into recession.

The central bank said on Friday that Europe’s largest economy would grow by just 0.1 per cent next year.

But it added that if President-elect Donald Trump followed through on his threats to impose a 10 per cent tariff on European goods and a 60 per cent levy on Chinese exports, this could knock as much as 0.6 percentage points off Germany’s GDP next year.

That would imply a contraction of up to 0.5 per cent.

The new forecast, published as part of the central bank’s monthly report for December, is much more gloomy than its June prediction, when it expected a mild recovery with 1 per cent GDP growth.

The Bundesbank has since written off any meaningful recovery in consumer spending next year and now also expects a decline in corporate investment.

“The German economy is struggling not just with persistent cyclical headwinds but also with structural problems,” said Bundesbank president Joachim Nagel, pointing to fading productivity growth and the crisis in large parts of Germany’s manufacturing industry.

The outlook comes as European economies – which are relatively exposed to the current slowdown in China – grapple with lacklustre growth compared to that of the US. They are also braced for the impact of a possible trade war when Trump re-enters office.

On Thursday, the European Central Bank weakened its growth forecast as it cut interest rates to 3 per cent, while on Friday the UK reported a monthly economic contraction of 0.1% for October.

Germans are set to head to the polls in snap elections in February amid widespread discontent over the country’s economic woes.

The German economy has not grown since a rebound after the pandemic, with GDP shrinking by 0.3 per cent in 2023 and 0.2 per cent this year.

The Bundesbank said that even the once gravity-defying labour market is poised to falter next year, with unemployment rising to the highest level in more than a decade and wage growth slowing.

Economists at the central bank are even more pessimistic than Germany’s widely respected Council of Economic Experts, which in November forecast 0.4 per cent growth.

The Bundesbank now foresees a mild recovery only in 2026, when GDP is expected to increase by 1.1 per cent, down from 1.6 per cent forecasted this summer.

Even without a trade war, the German labour market will suffer next year.

The Bundesbank’s baseline scenario shows that the number of unemployed will rise above the psychologically important threshold of 3mn in 2025 for the first since in 14 years, up from 2.8mn this year.

The unemployment rate is poised to rise from 6 per cent this year to 6.3 per cent in 2025, a level last seen in 2011.